One week after Iceland faced bankruptcy, Singapore guaranteed $700 billions deposits of various currencies. This blanket guarantee included foreign banks which had financial troubles in hundreds of billions of dollars.
Singapore’s reserves were used to back this guarantee. Our reserves represent the cumulative sacrifices, sweat, toil, tears, heartaches and headaches of numerous Singaporeans both present and past. Our savings are meant for our children, our aged, our beloved, our homes, our medical needs and to protect us from ruthless enemies. Yet, they were all placed in jeopardy by one single decision alone.
The U.S. Stock Market fell 89 percent during the Great Depression. Our reserves will be worth pennies on the dollar if the global economy had collapsed. However, depositors are still entitled to their $700 billion in cash at the click of the mouse. How is Singapore going to raise so much cash so fast? Such pressures will cause Singapore’s currency to fall and devalue our Central Provident Funds. Moreover, our liabilities for foreign currencies’ deposits will rise.
During market crashes, bank assets like loans and investments also fall dramatically in value. Massive banks' failures will make Singaporeans liable for most of the $700 billions deposits. Singapore can become indebted to many wealthy foreign depositors. Britain used anti-terrorism laws to freeze Iceland’s assets. Governments worldwide can also freeze Singapore’s assets.
Let us assume a scenario when Singapore becomes liable for $500 billions of depositors’ money. Our reserves had fallen in value to $400 billion. Singapore becomes indebted by $100 billions.
Blanket guarantee gives the weakest banks' depositors top priority claims to Singaporeans' reserves. This is true even if the weakest banks fall because of frauds, negligences, mismanagements, stupidities or speculations. Several foreign banks were in trouble when our local banks remain strong. This means Singaporeans' savings were placed on the front line for foreign banks' depositors to lay claims on. Lehman Brothers fell even though it had US$691 billion assets in Nov. 2007.
Since foreign banks had the greatest likelihood of failing, foreigners had the greatest likelihood of claiming the greatest amount of money from Singaporeans' sweat stained savings. Thus, the poorest Singaporeans will have to help pay off the richest foreign depositors.
Why did Singapore give a limitless guarantee? Isn’t this a terrible precedent for Singapore to set? Even the United States only raised the guarantee from US$100,000 to US$250,000. Why did the guarantee last till end of 2010? If there was major capital flight into Singapore, this could increase our absolute exposure drastically.
Parliamentary approval should be required to raise the guaranteed deposit above a preset limit. Parliamentary approval should be required before any foreign bank deposits can be guaranteed. Blanket guarantees are NOT sustainable and have led Ireland and Iceland into troubles. Laws must be enacted to ensure that only a limited percentage of our total reserves can ever be used for bank guarantees. PERCENTAGE is the most important word here because value of reserves plunge when markets plummet like waterfalls.
writejt@gmail.com
http://singaporereserves.blogspot.com
Yours Sincerely,
Joseph Tan
http://singaporereserves.blogspot.com
